In This Episode

Step aside, Millennials. There’s a new, younger group out there: Generation Z, which includes anyone born after 1996. To learn more about this generation, we sat down with Kim Parker, director of social trends research at the Pew Research Center.

After the Fact

“After the Fact” is a podcast from The Pew Charitable Trusts that brings you data and analysis on the issues that matter to you—from our environment and the sciences, to larger economic trends and public health.

How Fees Affect Retirement Savings Over Time

Compound interest is a powerful feature of investing. Small sums put aside routinely can grow dramatically over time. However, the same forces apply to retirement plan fees; what may seem like small charges can compound over time, hindering investment growth and resulting in significant forgone earnings.

Follow the scenarios or explore your own retirement to see the impact of fees.

Janet

Elinor

Janet and Elinor are college graduates in their mid-20s.

Both have landed well-paying positions that will pay annual pretax incomes of about $60,000 — about the average for someone their age with a bachelor’s degree. For simplicity, in these calculations, we assume a steady salary over 40-year careers.

Between their own contributions and an employer match, they each plan to save $175 or 7% of pay every two weeks.

Both figure that they have about 40 years of work ahead of them before they can consider retirement. For these calculations, their contributions never change.

From the options available in their retirement savings plans, Janet chooses Fund X, which estimates a 6% annual return but annual operating fees of 2.05%. Elinor chooses Fund Y, which estimates a 6% annual return but much lower annual operating fees of 0.05%.

Janet

Elinor

$175.00

Regular contribution

$175.00

Biweekly

Contribution frequency

Biweekly

40 Years

Investment term

40 Years

2.05%

Annual fee as percentage of total account balance

0.05%

If the higher-fee fund picked by Janet (2.05%) performs as well as the low-cost fund picked by Elinor (0.05%), Janet would lose nearly half of her potential investment value to fees and forgone earnings. After 40 years, she would have about $306,000 less than Elinor.

That’s roughly equal to working an additional 5+ years at her initial $60,000 salary.

The higher-fee fund would have to earn 33% more than the low-cost fund annually to allow for comparable fund growth.

Examine the impact of fees on retirement withdrawals or on your own retirement numbers.

Karl

Adam

$725,000

Principal investment

$725,000

$3,500

Monthly withdrawals

$3,500

20 Years

Investment term

20 Years

1.25%

Annual fee as percentage of total account balance

0.04%

If the higher-fee investment picked by Karl (1.25%) performs as well as the low-cost investment picked by Adam (0.04%), Karl would deplete his savings within 18.4 years while Adam would still have $43,503 at the end of 20 years.

The higher-fee fund would have to earn 61% more than the low-cost fund annually to allow for comparable fund growth.

Examine the impact of fees on retirement savings or on your own retirement numbers.

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